In previous blog posts, we have talked about how the future is uncertain and how we, at Allan Gray, invest for the long-term anyway and embrace uncertainty. But why not choose the opposite? Can one stick to the predictable, invest for the short-term, and still be successful?
When we buy shares of a business, we face the unpredictability of future cash flows that the business may generate. Even though most valuation methodologies rely on forecasting, both science and practice continue to show that long-term forecasts are so inaccurate that they are useless. Near-term forecasts, however, can be more accurate. Why do we therefore choose to invest for the long-term and embrace unpredictability?
Can short-term forecasts be the basis for a successful strategy?
Unfortunately, a short-term focus won’t help you avoid uncertainty. Even though forecasts can be more accurate in the near term, it is very hard to build a successful strategy on these forecasts because a short-term speculator faces two challenges:
- When accurate forecasting is possible, the average of all forecasts is more accurate than any individual forecast, simply because individual biases tend to cancel out – a phenomenon known as ‘The Wisdom of Crowds’. This means that the forecast already reflected in the share price is exceedingly likely to be better than the one made by an individual investor.
- Even if you could consistently make better predictions than the market, the high costs of short-term trading, fees, and taxes would erode your returns.
We invest for the long-term and embrace uncertainty
Instead of attempting to out-forecast the market, we embrace the unpredictability. We focus on business fundamentals and invest for the long-term rather than relying on short-term forecasts. We adopt approaches used successfully in many fields from science, to chess, to warfare: We invest statistically, prepare for the unpredictable, and exploit the market’s tendency to underestimate the degree of uncertainty.
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Equity Trustees Limited ABN 46 004 031 298, AFSL No. 240975 is the issuer of units in the Allan Gray Australia Balanced Fund ARSN 615 145 974, Allan Gray Australia Equity Fund ARSN 117 746 666 and Allan Gray Australia Stable Fund, ARSN 149 681 774 (Allan Gray Funds) and units in the Orbis Global Equity Fund (Australia registered) ARSN 147 222 535, Orbis Global Equity LE Fund (Australia registered) ARSN 613 753 030 and Orbis Global Balanced Fund (Australia registered) ARSN 615 545 170 (Orbis Funds). Allan Gray Australia Pty Limited ABN 48 112 316 168, AFSL No. 298487 is the investment manager of the Allan Gray Funds.
Past performance is not a reliable indicator of future performance. There are risks involved with investing and the value of your investments may fall as well as rise. This represents Allan Gray Australia Pty Limited and Orbis Investment Advisory Pty Limited’s view at a point in time and may provide reasoning or rationale on why we bought or sold a particular security for the Allan Gray or Orbis Funds or our clients. We may take the opposite view/position from that stated, as our view may change. If this article is authored by Orbis, it does not prohibit the Orbis Funds from dealing in the securities before or after this article is published. This article constitutes general advice or information only and not personal financial product, tax, legal, or investment advice. It does not take into account the specific investment objectives, financial situation or individual needs of any particular person and may not be appropriate for you. We have tried to ensure that the information here is accurate in all material respects, but cannot guarantee that it is.
You should consider the relevant funds’ Product Disclosure Statement (PDS) or Information Memorandum (IM), as applicable, before acquiring, holding or disposing units in the Allan Gray or Orbis Funds. The PDS or IM can be obtained from
www.orbis.com.au and www.allangray.com.au.
Target Market Determinations (TMDs) for the Allan Gray products can be found at
allangray.com.au/PDS-TMD-documents,
while TMDs for the Orbis Funds can be found at www.orbis.com.au on the 'Forms' page under 'How to Invest'. Each TMD sets out who an investment in the relevant Allan Gray or Orbis Funds might be appropriate for and the circumstances that trigger a review of the TMD.
Managed investment schemes are generally medium to long-term investments. They are traded at prevailing prices and the value of units may go down as well as up. There are risks with investing the Fund and there is no guarantee of repayment of capital or return on your investment. Subject to relevant disclosure documents, managed investments can engage in borrowing and securities lending. A schedule of fees and charges is available in the PDS.